Visa: Embedded Lending Provides Global Tailwind for Consumers and SMBs

Embedded lending options are proving to be critical lifelines for individuals and the smallest businesses — particularly in an uncertain macro environment marked by relatively high interest rates.

“Many times in life, when you expect it least, … and you need availability [and speed] when it comes to credit — or access to cash flows and capital. And all of it needs to be contextual,” Mathieu Altwegg, head of product and solutions for U.K. and Ireland at Visa, told PYMNTS in a recent interview.

Altwegg’s remarks came after PYMNTS Intelligence and Visa’s collaborative research showed that there’s a significantly untapped market for embedded lending, especially in Europe. It’s a landscape that’s poised for more entrants. Consider the fact that, as the report showed, half of lenders overall are not currently offering embedded lending, yet are strongly considering entering the market.

Reconsideration of Platforms and Lending

Visa, in particular, is seeing a surge in client firms working with traditional lenders to “replatform” and rethink their various lending propositions to extend credit and payment options to micro and small businesses.

“These small [businesses] will benefit from new levels of innovation,” Altwegg said.

At a high level, individuals and businesses want choice when they are offered various financing options — and they also want a smooth application process.

“With more options and competition in the embedded lending market,” he said, “we’ll answer everybody’s needs better.”

As for the most immediate advantages of embedded options, Altwegg said the ability to better manage cash flow is a clear benefit, enabling companies or individuals to manage their cash needs in unpredictable situations. Being offered an embedded option in context and in real time is a marked departure from traditional lending, which tends to be planned in advance and which can be tied to a relatively long approval and underwriting process.

With a nod to some market-by-market statistics, as uncovered by Visa and PYMNTS, only 14% of respondents said they were using embedded lending — the third-highest rate among the six markets studied (Australia, Germany, India, Japan, U.S. and U.K.). The difference of embedded lending penetration varied only a few percentage points, Altwegg said, adding that we’re at a high point in the overall credit cycle in terms of funding costs. That penetration is likely to increase as funding costs and interest rates come down, and more individuals and lenders reexamine how, when, and where credit can be obtained.

Open Banking Is a Boon

At the same time, better data availability and quality through open banking and digital identities can help improve the user experience and the performance of the loans themselves. Altwegg said Visa enables a data-driven “income check” that recognizes income that flows into a would-be or current borrower’s bank accounts and how expenses match up with that income, which proves useful in underwriting. This is the case with gig workers in particular, who may have several different streams of income.

Visa, for its part, has found its own efforts with Click to Pay instructive, underscoring the “need to drive the right user experience, literally at the screen or pixel level because consumers want not just choice but choice with trust,” Altwegg said. They want to know what the terms of the financing upfront are, who is extending the lending itself — whether it’s a merchant or provider — and other factors.

A data-driven approach, a seamless UX, and end-user demand focused on choice and trust all serve as a foundation to be built upon, “we’re still in the early days of embedded lending,” Altwegg said.